As part of the deal, Hezbollah also freed an Israeli businessman, Elhanan Tannenbaum, who was kidnapped in October 2000, the same month the three soldiers were killed.

Israeli Prime Minister Ariel Sharon joined relatives of the dead soldiers for a ceremony at Ben Gurion airport near Tel Aviv on Thursday evening. A guard of honour stood to attention as the coffins, draped in the Israeli flag, were carried into a hangar.

Mr Tannenbaum is also back in Israel, where he faces possible legal action over reports that he may have been trying to conclude a dubious business deal when he was abducted.

Hezbollah has warned it will kidnap more Israelis to secure the release of Lebanese prisoners, if necessary.

Hezbollah warning

Under the deal, Israel freed nearly 30 Lebanese and other Arabs and handed over the remains of 59 Lebanese militants.

Lebanese President Emile Lahoud was among thousands waiting at Beirut airport for a plane carrying the freed Lebanese. Hundreds of people lined the road to the airport, many waving Hezbollah flags.

Israel held a sombre ceremony for the three dead soldiers

The freed prisoners, among them senior Hezbollah members Sheikh Abdul Karim Obeid - held by Israel for 15 years - and Mustafa Dirani - who was captured in 1994 - had been flown in from an airbase in Germany, which was used as neutral territory for the exchange.

As he stepped from the plane, Sheikh Obeid wept and said he was a man reborn.

At the welcome ceremony, Hezbollah leader Sheikh Hassan Nasrallah said his group was "more determined than ever" to fight Israel.

He said his militants would capture more Israelis as a last resort if Israel did not release Lebanese militant Samir al-Qantar, who has been held since 1979.

"We have three choices... the third choice is this," Mr Nasrallah said, pointing to a poster of the ambush in which the three Israeli soldiers were killed.

Missing airman

The swap began in Germany early on Thursday when Israeli officials confirmed that coffins handed over by Hezbollah did contain the remains of the three missing soldiers.

That confirmation set off the series of prisoner releases. In the Palestinian territories of Gaza and the West Bank, the freed Palestinians prayed and kissed the ground as they reached checkpoints leading to their homes.

The BBC's David Chazan in Tel Aviv says some Israelis have criticised the prisoner exchange, saying it strengthened Hezbollah, and others have protested that a missing Israeli airman was left out of the first phase of the deal.

Negotiations mediated by German officials will now continue.

Israel wants to know what happened to the airman, Ron Arad, who went missing when his plane was shot down over in 1986.

If the Lebanese group provides that information, Israel says it may free Samir al-Qantar, who was convicted of killing Israeli civilians.